New Zealand is shaping up as a "country of two halves" in the rural sector due to weather extremes, BNZ says in its rural wrap out today.

Dry weather in the North Island is hurting pastoral farming, while the South Island is faring relatively well, the report said.

"We are keeping a close eye on the weather situation, but while clearly a negative we do not think it is an economic game changer at this point - not at least at the national level," the report's author, BNZ economist Doug Steel, said.

However, there would be adverse flow-on economic effects in the current dry areas, which include Northland and Waikato, as farmers reduced discretionary spending.

"This is likely to be most pronounced in sheep concentrated areas where farm profitability was already under pressure from a one-third drop in lamb and wool prices from a year ago," Steel said.

For milk production, BNZ expectedsome large "negative growth rates" in the North Island in February, March and April this year compared to last year. That was not only because of the dry weather but also because of last autumn's exceptional grass growth climate.

South Island dairy production, on the other hand, was expected to "keep honking along", showing strong growth even compared to last season's high levels.

For the whole season nationwide, BNZ anticipated national milk production to be up about 2 to 3 per cent on last year.

"In the bigger picture, this would be a very good performance; given that last season was a ripper (up 11 per cent on the previous season)," Steel said.

NIWA data shows the month of January had less than half normal rainfall across most of the North Island. It was record dry in Northland, Auckland, Waikato, Coromandel, Bay of Plenty and Masterton. At best, the early February rain bought a little time, Steel said.

"The dry is hurting North Island pastoral farming in particular. It is a negative for sure with agriculture production being lower than it otherwise would be. As far as we can tell, agriculture economic growth will be negative in quarter one 2013 (and possibly quarter two if more rain does not fall in the North soon)."

In contrast, it was very wet for much of the South Island in January. The lamb kill reflected the weather - being well ahead of last season in the North Island but behind in the South Island, even after adjusting for additional lambs this year, Steel said.

There was also stock movement from North to South. "While this raises costs, and is clearly negative for some, it can at least help limit the overall hit to national production."

For February to April, NIWA sees rainfall as likely to be near normal everywhere (or even above normal in the north of the North Island). A return to near normal soil moisture levels will take some time for those parts of the North Island currently very much drier than usual.